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Nobody likes to pay taxes -- and few people even want to think about taxes
until it's absolutely necessary. However, sometimes a decision as basic as
when to buy or sell mutual fund shares can impact how much you pay in
taxes. By educating themselves about tax issues involving mutual funds,
investors can take advantage of strategies to help reduce the tax burden
they face every year -- while still working toward their long-term
financial goals.
The Basics
When you sell shares
in a mutual fund, whether by redeeming, exchanging or writing a check,
you have created a taxable event unless the transaction occurred in a
tax-deferred retirement plan or a money market fund. At tax time, you'll
need to report any gain or loss on
your taxes.
Record Keeping
It is your responsibility to keep accurate records of your mutual fund
transactions. You will need this information when you file your income
taxes, since you must report any capital gains or losses you incur when
you sell shares. Remember, an exchange is a sale and a purchase for tax
purposes.
If you reinvest
dividends or capital gains distributions, you are purchasing additional mutual
fund shares. Retain all records of such reinvestments, because the amount
reinvested should be added to your cost basis.
Keep confirmation
statements from the mutual fund company which show complete information
for each purchase, sale or exchange, including the date, the number
of shares, price per share, dollar amount and any fees or commissions
in each transaction.
Many fund companies provide
year-end statements which are helpful in calculating your tax obligations;
however it is still suggested that you retain all confirmations and records.
It is best to keep your own records, so that you have them when you need
them at tax time.
Tax Forms
The fund company will provide you with a tax statement of your dividend and capital gains
distributions for the year on Form 1099 DIV. Proceeds from a sale are
reported on Form 1099B. You must report these on your taxes. Since the
IRS receives a copy as well, you could pay a penalty if you neglect
to report them.
The following
features will offer some suggestions on strategies to take advantage of
current tax provisions as you work towards financial security.
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